Nigerian states’ over-reliance on tax killing businesses – Report

With Federal allocations proving to be grossly insufficient for running a state in Nigeria, many sub nationals have turned to taxes and levies to survive. Still, many of them are barely surviving because the tax systems in many of these states are a mess.

The reality is that only a few businesses in Nigeria are complying with regulations in paying tax, and they are being forced to shut down due to multiple taxations, SBM Intelligence said in a recent report.

SBM Intelligence said the tax system does not hold a majority of businesses responsible for not paying taxes and puts pressure on the very few that are complying.

Consequently, business owners that are remitting taxes to the government are lamenting over taxation and undue harassment by collection officers in many Nigerian states for government to grow their local revenues.

Apart from monthly allocations from the Federal Government, many subnational entities in the country rely mostly on taxes to fund projects, pay salaries and keep the machines of the state going.

Unfortunately, many states have acutely limited tax nets, with the informal sector almost perpetually enjoying tax-free operations. Those that are taxed are being yoked by multiple levies.

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The reason for banking taxes is not farfetched. Many of the states are financially insolvent. Instead of looking for creative ways to solve this problem, state administrators look for the easiest way out – tax the already overburdened businesses and people who are themselves battling declining spending power.

In 2017, only Lagos, Ogun and Osun generated more in IGR, than they collected in federal allocations. By 2018, Osun had fallen off this list. 2019 saw a huge positive change as Lagos, Rivers, Ogun and Delta all generated more in internal revenue than they were fed by Abuja.

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By 2020 however, we were back to just Lagos and Ogun generating more in internal revenue than they received from Abuja. This state of affairs indicates that almost all of Nigeria’s federating units are not fiscally healthy.

“In the end, this has the unintended effect of creating a harsh business environment for all and in some cases, forcing businesses to close due to over taxation and/or harassment,” the report said.

Players in Nigeria’s telecommunication sector were identified as the prime victims of over taxation and harassment by authorities.

“Our review reveals that there are over 40 different taxes and levies meted out upon the Mobile Network
Operators (MNOs) carrying out telecoms services in Nigeria,” the report said.

The report titled ‘State of Mind: Inside Nigeria’s Subnational Fiscal Crisis’ highlighted the challenges and performances of the states’ internally generated revenues, noting that “almost all of Nigeria’s federating units are not fiscally healthy.”

It, however, noted that the harsh economic environment is in reaction to a sharp fall in oil prices from which the federal allocations are shared with the states and leaves them broke in the absence of the funds.

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“This means that when these oil revenues fall, it puts them in precarious situations, leaving them unable to meet their basic obligations such as paying salaries, wages and pensions not to mention providing social services and infrastructure,” the report said.

“This scenario has taken place twice in the last five years, requiring the Federal Government to bail out the states in 2017 and 2021.

“This has increased the urgency of states to increase their internally generated revenue in order to reduce their exposure to volatile and unreliable federal allocations.”

The report stated that the state’s efforts to increase revenues are in turn causing untoward hardship on businesses and business owners.

“Although the Taxes and Levies (Approved rates for collection) Act 1998 provides a list of taxes and levies to be collected by all tiers of government, state governments routinely impose taxes and levies outside the list in a bid to shore up revenues,” the report said.

SBM Intelligence advised state governments to “expand their tax nets as well as improve their capacity to assess and collect taxes on economic activities in their domains.”

“This will also benefit the states when constitutional amendments are undertaken to shift the collection of taxes currently exclusive to the federal government either in full or part to the state governments.”